Aflac Stock: Should Be Part Of Any Dividend Growth Portfolio (NYSE:AFL)

Dia Dipasupil
Overview
Aflac (NYSE:AFL) is a company that specializes in offering supplemental health and life insurance products. The company operates in two main segments: Aflac Japan and Aflac U.S. In Japan, Aflac provides various insurance products, including cancer, medical, nursing care, and life insurance. In the United States, the company offers a range of insurance products such as cancer, accident, short-term disability, critical illness, hospital indemnity, dental, vision, and whole life insurance.
I like AFL because it performs well as a dividend growth holding. Although the starting yield is quite low at 2.4%, the growth and consistency would have boosted your income and yield on cost over time. Your yield on cost would have grown to 3.8% if you were holding over the last five year period. I recognize that I tend to lean towards higher yielding stocks but it’s good to bring focus to these high quality growers as well. AFL is one of those companies that have a long history of providing value to shareholders and as you can see, AFL crushes the S&P 500 (SPY) in total return since inception.
Data by YCharts
Q3 Earnings
In their latest earnings report, Aflac reported total revenues of $5.0 billion, marking a year-over-year increase from $4.7 billion. Net earnings for the quarter were $1.6 billion, or $2.64 per diluted share, compared to $2.82 per diluted share, in the same period the previous year. For the first nine months of 2023, total revenues decreased by 1.8% to $14.9 billion.
AFL reported a 3.2% increase in net earned premiums to $1.4 billion in the third quarter, driven by growth initiatives within the U.S market. Adjusted net investment income rose by 13.0% to $209 million, contributing to a pretax adjusted profit margin of 28.8%. Aflac U.S. sales increased by 7.5% in the quarter to $359 million. For the first nine months, net earned premiums in the U.S. increased by 2.2% to $4.3 billion, and adjusted net investment income increased by 8.2% to $609 million. Total adjusted revenues were up 2.4% to $5.0 billion, and pretax adjusted earnings rose by 17.5% to $1.2 billion.
Data by YCharts
AFL persists in generating capital and cash flows while also maintaining a healthy level of liquidity. They hold over $5B of cash & equivalents on hand, so there is no doubt they can weather any type of uncertainty or challenges down the road. AFL has also been actively repurchasing shares at historically high levels. Management’s strategy going forward seems to involve a balanced approach, focusing on investing in growth initiatives and improving long-term operational efficiencies.
When a company buys back its own stock and keeps increasing the money it pays as dividends to shareholders, it’s like a double win for us investors. Stock buybacks can make each share more valuable, and it shows that the company believes in its own success. On the other hand, increasing dividends means investors get more regular payouts. So, it’s like the company is saying, “We’re doing well, and we want you to share in the success.” This leads me to talk about the stellar dividend growth next.
Data by YCharts
Dividend Growth
As of the latest declared dividend of $0.42/share, the current dividend yield is a bit over 2.4%. AFL has a really great payout ratio at only 26.5% and they are creeping in on dividend king status with 41 years of consecutive dividend growth. Talk about quality and reliability! In addition, the 5 year dividend CAGR is roughly 10% so over the last 5 year period, the dividend has grown a total of 85%. The really low payout ratio of 26% leaves a lot of room on the table for continued dividend growth so I have no doubt that AFL will eventually cross that 50 year dividend milestone.
Data by YCharts
Great news has also been announced pretty early. AFL announced 2024’s first dividend payment at $0.50/share, payable in March of 2024. This new dividend going forward represents a 19% raise! The dividend growth story here has been stellar. According to Portfolio Visualizer, If you were to hold $10,000 worth of shares from 2010 – today, your dividend income would have grown 5x if you reinvested dividends only without deploying new capital.
Portfolio Visualizer
Valuation
The price of AFL has been consistently moving upward since March of this year. Still though, I believe there is some upside that can be captured here. For reference, the average Wall St. price target was already passed at $79.50/share. With increased profitability throughout the year, I would anticipate some adjusted price targets to reflect accordingly.
We can determine our own fair value estimate for AFL using a discounted cash flow model. The EPS estimate for the year of 2024 sits at 6.37x and their earnings growth over the last 5 years has averaged about 3.4%. So we feel that using these input here will serve as reliable inputs. We can see that using these metrics, the fair value sits around $86.67/share. This would represent a slight upside of approximately 7%.
Money Chimp
AFL’s forward P/E ratio sis at 9.51x compared to its 5-year average of 10.43x. For reference, the sector median forward P/E is 10.96x so this does reinforce slight undervaluation. Although, a 7% upside is not too exciting I’ll admit. However, I believe AFL is better utilized in a dividend growth portfolio because of their great track record in this area. Once again, their dividend payout ratio is very conservative and leaves lots of room on the table for continued increases into the future.
Risks
Aflac has a lot of cash on hand and has performed well so far. Yet, they do have an area of weakness that isn’t as controllable. One threat to Aflac is the weakening yen, which the management has actively addressed by focusing on liquidity preservation. This is why we see they are holding over $5B in cash & equivalents.
Secondly, the price sits above many analysts’ price target so the stock may be richly valued at the moment. If the next earnings report comes in with lackluster growth, I would expect the price to remain sideways or even trade down a bit. This all depends on the performance going forward however and there’s been no indication of reasons to worry about that as of yet.
Takeaway
Aflac stands out as a strong option for those seeking a combination of dividend growth and stability. AFL’s commitment to shareholder value is evident through its remarkable 41 consecutive years of dividend increases. The recent 19% increase in the first-quarter 2024 dividend further emphasizes the company’s positive trajectory.
Despite market fluctuations, AFL’s prudent approach to stock buybacks, strong cash flows, and strategic investments in growth initiatives contribute to its financial robustness. While potential risks, such as currency fluctuations and valuation concerns, warrant attention, AFL’s impressive dividend growth track record and sound financial fundamentals make it a noteworthy contender for investors looking for a reliable and income-generating addition to their portfolios.